Index-linked Gilts

mal4mac

From my favourite investment book, "The Little Book of Common Sense Investing" by John C. Bogle: "My favourite rule of thumb is (roughly) to hold a bond position equal to your age-20 percent when you are 20, 70 percent when you're 70, and so on-or maybe even your age minus 10 percent. There are no hard and fast rules here. (Most experts think my guidelines are too conservative. But I am conservative.)"

Take a close look at what shares and gilts have been doing over the past decade and you will see the advantage of being conservative! Gilts have beaten shares. What if the next three decades are just as bad or (possibly a lot) worse? Gilts give you some diversification, as do cash and property. Gilts provide almost as much safety as money, with (probably) better returns. Shares and property are risky (do I need to tell anyone that in present circumstances?) Surely it's a good idea to start factoring in safety and diversification at a young age?

mal4mac

No one can know if investing in gilts or shares right now is the best strategy. Following Bogle, surely it is best to take a long term view and get going with investing in regards to that long term view? If I was starting at 26 I would just get going with the 74/26 shares/gilts strategy and forget about the guesses of forum speculators. Next year you can rebalance to 73/27, and keep on doing that. Basically, it doesn't matter what shares or gilts are doing now, but what they will do over the next 50 years on average.

sabretoothtigger

Take a close look at what shares and gilts have been doing over the past decade and you will see the advantage of being conservative! Gilts have beaten shares.

Thats retrospective advice. Gilts beat shares, yep and its very unlikely they can repeat the gains because the yield is too low to match likely future inflation.

What if the next three decades are just as bad or (possibly a lot) worse? Gilts give you some diversification, as do cash and property.

Be diversified but gilts arent going to repeat the last three decades. They started off in 1980 at 15% yield and thats not where we are now.
Whats more likely is we repeat the last 40 or 50 years and yields now start rising to justify risk and inflation. The worth of the bonds falls which would make it less worthwhile as a hedge.
A quarter in gilts for someone so young is overplaying it and its being based on this previous outperformance

Houses and bonds are both good investments but they can both consistently lose money even if they never fell before in recent memory

mal4mac

sabretoothtigger wrote: »

Thats retrospective advice. Gilts beat shares, yep and its very unlikely they can repeat the gains because the yield is too low to match likely future inflation.

I was suggesting the original poster should look at 2007-2009 to see how much money can be lost in shares (how 'volatile' they can be.) Of course, since records began, shares have beaten gilts on average - think 'something like' 5% for gilts and 10% for shares. But there are long stretches when shares have yielded very negative returns, while gilt returns have been pretty steady.

sabretoothtigger wrote: »

A quarter in gilts for someone so young is overplaying it and its being based on this previous outperformance

Bogle is not basing his recommendations on this outperformance.

sabretoothtigger

Bogle is not affected by a 30 year bull market in bonds, I'd be surprised if his judgement wasnt swayed by that. I'd say bonds outside that continuous rise are worth considering because they have a better chance of doing better in future

Gilts are an investment in government. All the tricks they are pulling are to justify continuing faith in that concept. Nobody really cares about Greece that much, its what it implies about others that is forcing a produced solution.

I'd rather see people look outside an idea popular for so long and kept in place artificially. Real growth and secure returns come from new working ideas not really servicing the old debts and accumulated bad ideas they wont let go.

Greece entered the Euro as a fraud, why not just wipe out that mistake and start it again properly, doing the opposite is not an investment in growth (I dont think its safe either)

pqrdef

sabretoothtigger wrote: »

Gilts are an investment in government. All the tricks they are pulling are to justify continuing faith in that concept. Nobody really cares about Greece that much, its what it implies about others that is forcing a produced solution.

Well, every war we've fought since the 17th century has been fought with borrowed money. The government's credit is as essential to the defence of the realm as the armed forces.

Not that our present armed forces would be much use for the defence of the realm, of course.

masonic

sabretoothtigger wrote: »

Thats retrospective advice. Gilts beat shares, yep and its very unlikely they can repeat the gains because the yield is too low to match likely future inflation.

This thread is about index linked gilts. Don't the yield of these rise in line with inflation?

Ark_Welder

The price of IL gilts is driven by demand so there are times when they can be over-priced - just like other assets. If they are and the rate of inflation to the redemption date turns out to be lower than expected then the actual return could be less than inflation. Similarly, negative rates of inflation could mean that the capital returned might be less than the original amount invested.

For anyone new to these then I would suggest having a good read first. A starting (or possibly, ending) point might be the UK Debt Management Office's Index-linked Gilts section. Before then I would stick to NS&I certificates if you want to protect against possible inflation. I have the latter, but have not had index-linkers for a few years now.

smallfry27

mal4mac wrote: »

Bogle the index tracking guru suggests (roughly) putting the same amount in gilts as your age.

I haven't got Bogle's book to hand, but I think the aim is to hold something 'defensive' rather than specifically gilts or government bonds. Hale suggests you buy Index-linked National Savings - yes boring/granni-ish but they are tax-efficient and they can't go down. An old Motley Fool book I've got gives a very persuasive cost comparison of using ILNS building up over many years versus the rollercoaster of equities. This will not of course convince anyone who prefers a high-risk /high-reward approach. All I know is I would be several thousands of pounds better off if I'd invested in ILNS over the last ten years instead of the managed funds that paid my IFA's commission. If I'd been investing over a different ten years, might have been quite a different result. As I'm now at retirement I may never be able to make up my losses.

Masomnia

The point is, if you cherry pick your data you can find that any asset class has out-performed another in some way or other.

Looking at the past ten years up to now is pointless. It's the next however many years that are important.

What is the yield on the gilts now? What level of RPI is factored into that? How do you think RPI will turn out compared to what the market expects?

These are the questions you need to look at.